Shortages put energy start-ups in spotlight

Despite the malaise that has sapped enthusiasm for most Net and technology companies, those with an energy twist have been raking in venture capital and making public-market debuts.

January 2, 20024:43 PM PST

Although California's energy crisis panics most technology companies in Silicon Valley, some start-ups aren't afraid of the dark.

Executives in the energy niche say the Golden State's rolling blackouts have made venture capitalists take notice of their projects and prospects. Once considered a relatively dull subset of the broader technology sector filled with Old Economy utility behemoths, the energy industry has expanded to include start-ups such as business-to-business e-commerce ventures that build online exchanges for energy providers.

Such companies have turned the state's power plight into a flashpoint for investors looking for more stable alternatives to belly-up Internet stocks. Despite the malaise that has sapped enthusiasm for most Internet and technology companies, those with an energy twist have been raking in venture capital, outperforming their pure technology peers, and even making their public-market debuts.

"The big thing in California has raised public consciousness across the country. People realize now they can't take their power for granted," said Jake Tarr, managing director for Kinetic Ventures, a venture capital firm focused in part on how the Internet can help utility companies through deregulation.

"A year ago, we never thought about whether our lights would come on or if our computer would work," said Tarr, who toggles between Kinetic offices in Atlanta and Chevy Chase, Md. "Today, everyone recognizes that this digital economy can't operate without power."

Executives at Santa Clara, Calif.-based Automated Power Exchange, an online market for wholesale electricity, said they have been virtually untouched by the financial downturn of the broader technology sector. Venture capital for the private firm has grown steadily since 1997, with funding rounds of $8 million in 1997, $15.6 million in 1999 and $36 million in 2000.

The company opened offices in the United Kingdom and found a broker in Norway in March, and in July it will open a Texas office. APX plans to be profitable by the middle of next year.

"The energy business isn't impacted by the same fundamentals as technology as a whole," said Russ Kinsch, chief financial officer of APX. "The growth in the market, the aging of energy infrastructure--it's all coming to a head at once. More than the media hype, we see an industry that's in dire need of new solutions."

Venture capitalists have also noticed a slew of other energy-oriented companies. Later this month, Solar Development Capital will make its first private equity investments in the sector with a $28.75 million fund. The fund, supported in part by World Bank and a number of U.S. foundations, will target at least 20 energy start-ups in Brazil, Indonesia and South Africa.

Electric power-system developer Northern Power Systems of Waitsfield, Vt., received in May a second round of financing for $10 million. Also last month, Austin, Texas-based start-up EnWorkz announced plans for $1.5 million to $2 million in venture funding with only 16 employees, including 10 in Singapore. The software development company will provide "energy information" products and will target energy and utility companies in deregulated areas.

The only Mississippi-based company to receive venture funding in the first quarter of 2001 was SmartSynch, according to a recent survey by PricewaterhouseCoopers. SmartSynch provides wireless data connections to the meters of utility customers.

While California blackouts are shining a spotlight on the niche, energy-related companies are also reaping the benefits of continued deregulation. Deregulation in the electricity business was little more than a rumor--or threat--for most of the 1990s, but a state-by-state evolution toppled several giant utilities in the late '90s.

Because energy is riding an economic evolution, as well as a growing consciousness of environmentalism, proponents say energy start-ups may have more staying power than flash-in-the-pan business-to-business or business-to-consumer e-commerce stocks that were the rage in the late 1990s and early 2000.

"The difference is that global warming has raised its ugly head prominently in the newspapers, and people are finally talking about fuel cells and distributed power generation using natural gas," said Henry R. Linden, the Max McGraw professor of energy and power engineering and management at the Chicago-based Illinois Institute of Technology.

"We're going to electric motors in automobiles. The whole concept of clean, distributed generation as an energy source is a very good business," Linden said. "It's a done deal as far as I can see. It's not going away."

As proof, Linden pointed to the initial public offering of Proton Energy Systems. Although it got off to a rocky start and slid from its October launch until the start of the new year, the stock has increased 13.81 percent since January and now trades at $11.95.

Others are inspired by Canadian power supplier and researcher Ballard Power Systems, which develops, manufactures and markets zero-emission proton-exchange membrane fuel cells. The stock is down about 30 percent in the past year and now trades at $53.41, but that still beats the average Nasdaq stock by more than 10 percent. In addition, stockholders who have owned shares for two years saw more than a 60 percent growth in their investment vs. a slight loss for the Nasdaq average.

Energy companies are also attracting attention because investors, once enamored of Internet stocks, have debased the niche and are looking for new havens. The mania for business-to-business e-commerce companies in late 1999 and early 2000 all but drowned out a bullish research paper written by Credit Suisse First Boston researchers, who predicted a sharp upturn for energy stocks and put "strong buy" ratings on leading companies.

"The fall of regulatory barriers will create opportunities which should lead to a winner-takes-all mentality in some segments of the business," CSFB's electric utility research team, led by Andrew Levi and Paul Patterson, wrote in a report dubbed "New Economy Electrics." The duo predicted several energy-related ventures would "deliver superior shareholder value by transforming themselves from regulated, mostly regional monopolies to high-growth, knowledge-based businesses with high returns."

CSFB researchers also found that several electric companies were predicting earnings growth of 9.5 percent annually, with dividend yields averaging more than 5 percent. At the time, the average price of utility stocks was 11.5 times 2000 earnings and 10.5 times 2001 earnings--a fraction of the ratio for high-flying Internet and technology stocks.

Though they offer returns that are far less explosive than technology investments were in the late 1990s, environmentalists say they're relieved that they're finally catching on.

"In the next couple of years, you're going to be seeing a lot of investing in renewables and efficiencies," said Elizabeth Brown of the Washington-based think tank American Council for an Energy-Efficient Economy. "Energy is expensive right now, and it's important for people to find cheaper energy. It's pretty nice to hear that the private sector is doing it. That's a nice change."